Unless you were fortunate enough to be born with a silver spoon in your mouth, odds are that you will need to borrow money at some point in your life.
Perhaps you borrowed some money from your parents as a young teenager to buy something your allowance couldn’t cover. After finishing high school, you probably took out a student loan to cover for your college expenses.
Now that you’re a member of the workforce, you may be considering taking out a loan to pay for a car or maybe even your dream home.
Before you get too far ahead of yourself, it’s important to remember that your options will be impacted significantly by what kind of credit score you have. Many experts in the financial industry such as Graylock Advisors are quick to remind people about how their credit score will determine how easy or difficult it is to secure any kind of loan.
In this article, you will be able to learn more about the basics of the credit score and how having a good or bad one can affect your life.
What You Need to Know about the Credit Score
According to Investopedia, the credit score is a “statistical number that evaluates a consumer’s creditworthiness and is based on credit history.” Think of it is a rating that potential lenders can look at to see if you are someone who has shown the capability to pay back a loan.
Credit scores are expressed as three-digit numbers. If you’re wondering why credit scores are conveyed in that manner, it’s because they are calculated using the model created by the Fair Isaac Corporation. You’ve probably also heard credit scores referred to as FICO scores, and now you know where that name comes from.
Equifax, Experian, and TransUnion are the three agencies in charge of providing credit scores. You can secure one free credit report from each of those three agencies once per year, as noted by the Federal Trade Commission.
Time when you request your free credit reports correctly and you should stay updated throughout the whole year.
How Credit Scores Are Calculated
Five main factors are accounted for in credit score calculation, with those being your payment history, the amount of debt you owe (if any), the history attached to the credit line, the different types of credit you may have, and any new credit under your name.
Of those five factors, payment history and the amount of debt you still owe have the biggest impact. If your payment history is not exactly pristine or you still have a lot of debt to pay off, don’t expect your credit score to come back looking good.
Speaking of which…
How Credit Scores Should Be Interpreted
Once you open up that credit report, you will be greeted by the three important digits that could very well determine how much financial flexibility you will have in the near future.
The credit score range typically goes from 300 all the way up to 850.
According to Experian, individuals with a credit score no higher than 579 are considered to have a “very poor” rating. So, what does that mean?
With a credit score in that range, expect a fair amount of rejections when you’re trying to apply for loans. Even if you are able to secure a loan, the borrower may require you to pay a deposit or provide some kind of collateral.
People with a credit score in the 580 to 669 range are considered to have a “fair” rating. Finding a willing lender with this kind of credit score shouldn’t be too hard, but the interest rate for the loan is likely going to be quite high.
The next group features people with a credit score that goes from 670 to 739. You should be able to find a lender quickly if you have a “good” credit score and the interest rate presented to you should also be in line with industry averages.
One step up the ladder are people with credit scores that go from 740 to 799. By having a “very good” credit score, you should have no trouble finding willing lenders and the rates you’ll be offered will be quite favorable.
Last up are people with “exceptional” credit scores – anything above 800. You will be able to select from numerous loan offers and shop for the best rates with that kind of credit score.
How You Can Address Bad Credit
Don’t be disheartened if you have either a “very poor” or “fair” credit score. That score is not permanent, and you can do something about it.
Industry experts such as Graylock Advisors urge people to work on paying off the debt they currently owe consistently. That way, two of the biggest factors in determining the credit score are addressed.
You should also take a closer look at your credit report to see if there may be any bits of erroneous information included in it. Those could be weighing down your credit score unfairly. File a dispute to get rid of them.
The experience of shopping for a loan will be incredibly different depending on what kind of credit you have and the same can be said for the experience you will have paying off that loan. Be sure to keep a close eye on your credit and adopt the habits necessary to obtain and maintain a good score.